Get Out of These 2 Blue-Chip Energy Stocks (For Now)

Although it looks like there might be a compromise that avoids a U.S. air or missile strike in Syria, the one thing we know about the Middle East is that tension and conflicts can ignite at any time.

Geopolitical pressures in the region will continue to spark both rallies and selloffs in the oil markets. Traders will often try to place bets on energy stocks to capture the rise and fall of the European markets, and as we’ve discussed here[1], that’s usually the exactly wrong way to approach oil & gas stocks. Long-term trends favor the increased usage if and demand for oil and gas around the world. By owning the very best stocks in the group, investors can benefit from that long-term trend.

It is equally important to avoid stocks where short- to intermediate-term factors are pressuring fundamentals.

The U.S. market in particular is awash in cheap natural gas, and many companies with a higher cost structure are struggling to make a satisfactory profit right now. It will be a long time before natural gas prices recover to the point these companies are legitimate growth issues once again, so investors need to avoid them for now.

Some investors might want to hide out in large energy stocks, figuring their blue-chip status would protect them and allow them to profit when oil demand and profits increase. Unfortunately, that is exactly the wrong approach.

For years, Exxon Mobil (XOM[2]) has been thought of as the ultimate blue-chip energy stock and suitable for holding through all market conditions. With the global economy struggling right now, that is no longer the case. It might be again at some point in the future, but right now Exxon is not seeing revenue and profit growth worthy of a top quality holding. The company’s fundamentals have slipped steadily, and back in April the stock was downgraded to the lowest possible grade of “F” by Portfolio Grader. Conditions have not improved since, and XOM remains a “strong sell.”[3]

Chevron (CVX[4]) had been doing a slightly better job of maintaining its fundamentals, but as the domestic and international demand has flattened, that has finally changed. After being rated a “hold” for several months, CVX was downgraded in August to a “D” ranking and remains a “sell.”[5]

Owning Big Oil was once a way to play the long-term trend for increasing oil demands, as well as geopolitical price movements, but that’s no longer case. For now, these stocks should be avoided as the intermediate headwinds are much stronger than the long-term price trends.